Citation: 2008TCC146
Date: 20080310
Dockets: 2007-2784(CPP),
2007-2832(EI)
BETWEEN:
NEW AGE TRANSPORT INC.,
Appellant,
and
THE MINISTER OF NATIONAL REVENUE,
Respondent.
REASONS FOR JUDGMENT
Boyle, J.
[1]
The Appellant, New Age
Transport Inc., has appealed assessments under the Employment Insurance Act
and the Canada Pension Plan for 2004 and 2005. The EI assessment is in
respect of New Age Transport’s employment of Mr. Gustafson. The EI
assessment did not extend to Mr. Vail because the Canada Revenue Agency
(CRA) understood that Mr. Vail owned all of the shares of New Age
Transport at the relevant times and his employment was therefore excluded
employment under paragraph 5(2)(b) of the EI Act. The CPP
assessments are in respect of New Age Transport’s employment of both
Mr. Gustafson and Mr. Vail. I understand the CPP assessments are in
respect of the employer’s CPP contribution as well as its failure to withhold
and remit the employees’ contributions.
[2]
At the close of the
evidence, the Crown conceded that Mr. Gustafson’s employment was excluded
from the definition of insurable employment by virtue of the exception set out
in paragraph 5(2)(i) of the EI Act for employees who do not deal
at arm’s length with their employer. Thus, only the CPP assessments of New Age
Transport remained in dispute in this proceeding.
[3]
The issues raised by
the Appellant’s evidence with respect to the CPP assessments are:
1)
Were Mr. Gustafson
and Mr. Vail employees of New Age Transport or were they independent
contractors?
2)
If they were employees,
were the amounts paid to them by New Age Transport to be treated in whole or in
part as travel allowances or reimbursements of travel expenses that reduced the
amount of contributory salary and wages?
Employees or independent contractors
Subsection 6(1) of the CPP provides that
pensionable employment is any employment in Canada,
subject to certain exceptions that are not relevant in this case. Subsection
12(1) of the CPP provides that contributory salary and wages is,
generally, the income from the pensionable employment computed in accordance
with the Income Tax Act.
[4]
In cases involving the
differing tax, EI and CPP treatment of employees and independent contractors,
it is helpful to know that employment is often referred to as a “contract of
service” whereas an independent contractor enters into a “contract for
services”.
[5]
The
issue of employee versus independent contractor for purposes of the definition
of pensionable employment is to be resolved by determining whether the
individual, in this case each of Mr. Gustafson and Mr. Vail, is truly operating
a business on his own account. This is the question set out by the British
courts in Market Investigations, Ltd. v. Minister of Social Security,
[1968] 3 All E.R. 732 (Q.B.D.), approved by the Federal Court of Appeal in Wiebe
Door Services Ltd. v. The Minister of National Revenue, 87 DTC 5025 for
purposes of the Canadian definitions of insurable employment and pensionable
employment, and adopted by the Supreme Court of Canada in 671122 Ontario
Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983. This question is
to be decided having regard to all of the relevant circumstances and having
regard to a number of criteria or useful guidelines including: 1) the intent of
the parties; 2) control over the work; 3) ownership of tools; 4) chance of
profit/risk of loss; and 5) what has been referred to as the business
integration, association or entrepreneur criteria.
[6]
The
decision of the Federal Court of Appeal in Royal Winnipeg Ballet v. The Minister
of National Revenue, 2006 DTC 6323 highlights the particular importance of the
parties’ intentions and the control criterion in these determinations. This is
consistent with the Federal Court of Appeal’s later decision in Combined
Insurance Co. of America v. Canada (Minister of National Revenue), 2007 FCA
60 as well as its decision in City Water International Inc. v. Canada
(Minister of National Revenue), 2006 FCA 350. The Reasons of this Court in Vida
Wellness Corp. v. Canada (The Minister of National Revenue), 2006 TCC 534 also
provide a helpful summary of the significance of the Royal Winnipeg Ballet decision.
More recently, the Chief Justice’s Reasons in Lang v. Canada (The Minister of
National Revenue), 2007 TCC
547 are
also very helpful on this point.
[7]
The Appellant’s Notice
of Appeal does not refer to Mr. Vail or Mr. Gustafson as employees,
nor does it refer to New Age Transport as an employer. The assumptions set out
in the Crown’s Reply do not assume that Mr. Vail and Mr. Gustafson
were employed by New Age Transport, nor did they make any assumptions relating
to any of the employment versus independent contractor criteria or guidelines
enumerated above. Thus, CRA’s CPP assessment is not to be presumed correct in
this respect. The Appellant only has the traditional civil burden of proof to
satisfy the Court, on a balance of probabilities, that its evidence (since the
Crown did not call any evidence), as tested in cross-examination, is more
consistent with the working relationships being those of independent contractors
than of employment.
[8]
New Age Transport was
incorporated by Mr. Gustafson in 2002. At that time, he was its sole
shareholder. New Age Transport was in the long distance trucking business.
Mr. Vail and Mr. Gustafson were the only people who worked for New
Age Transport. Mr. Vail worked for New Age Transport and part of his consideration
for that work was to be an earned 50% interest in the company. As things turned
out, they never became 50/50 shareholders. Mr. Gustafson remained the sole
shareholder until October 2004. After that time, Mr. Vail became the sole
shareholder. This apparently had something to do with Mr. Gustafson’s
financial difficulties and ultimate bankruptcy. Mr. Vail remained the sole
shareholder until the company or its business was wound up in 2005. In 2006 the
corporation was struck off the provincial corporate registry.
[9]
Each of Mr. Vail
and Mr. Gustafson gave evidence. Mr. Vail’s evidence was clear and
consistent, even through cross-examination, that they were not employees at any
time. He was unwavering on this point. Mr. Vail had been excluded when
Mr. Gustafson had earlier given his testimony.
[10]
Mr. Gustafson on
the other hand conceded in his testimony that they were technically employees
only because he understood that anyone who did work for a company was an
employee. He qualified his testimony and answers this way on more than one
occasion. Mr. Gustafson was mistaken in his understanding of the
technicalities of employment and tax law.
[11]
The Crown put in
evidence CRA Forms TD4 signed by Mr. Gustafson, Mr. Vail and New Age
Transport certifying that in 2004 and 2005, they were employees who worked at a
remote or a special work site for purposes of subsection 6(6) of the Income
Tax Act. Mr. Gustafson explained that they understood from their
discussions with CRA at the outset that these were the forms they needed to use
to claim the amounts paid to them as non-taxable allowances for meals and
lodging while they were on the road. In this respect, they were also mistaken
as their long distance trucking activities could not constitute employment at a
remote or special work site under the relevant provision, even if they were
employees.
[12]
Both witnesses
testified that they were responsible for paying for their meals, lodging and
showers while on the road as well as some vehicle maintenance.
[13]
There was very little
factual evidence tendered on the Wiebe Door criteria or guidelines described
above for determinations of employment versus independent contractor. There was
virtually no cross-examination of any facts relating to those criteria or
guidelines.
[14]
Given the scant
evidence on this issue, which is key to the determination of whether the CPP
assessment against New Age Transport is correct, this is not a case in which I
can come to a comfortable conclusion with a normal degree of certainty that
Mr. Vail and Mr. Gustafson are or are not New Age Transport’s
employees. However, in light of my comments above regarding the burden of proof
on the Appellant being on a balance of probabilities, I can conclude that the
evidence made out a prima facie case that the working relationships were
those of independent contractors and not employment, and that this was not
successfully challenged in cross-examination, either directly or indirectly, by
reference to Wiebe Door considerations or otherwise.
[15]
Most importantly,
Mr. Vail said categorically on more than one occasion that they were not
employees and rejected each suggestion to the contrary.
[16]
I do not find
Mr. Gustafson’s qualified answer helpful since he was clearly in error on whether
an individual can work for a corporation as an independent contractor.
[17]
Similarly, I do not
find the irrelevant remote work site forms very helpful and certainly not
persuasive. While the fact that Mr. Vail and Mr. Gustafson signed
those forms raised other questions in my mind, I do not regard them as evidence
of the parties’ intentions with respect to their working relationship. They either
are or not employees. What one is willing to tick off and certify on a form
does not determine the issue of employment versus independent contractor any more
than does a heading at the top of a contract. Such determination can only be
made by reference to the actual working relationship and the intentions of the
parties.
[18]
I conclude that the
intentions of Mr. Gustafson and Mr. Vail, as well as that of the
corporation of which they were the sole shareholders, was not to create an
employment relationship. This was evidenced by Mr. Vail’s insistence that at
no time were they to be employees.
[19]
Of course, intention
alone cannot determine the issue. Another important consideration is that of
direction and control over the work to be done. In these particular
circumstances, since Mr. Gustafson and Mr. Vail were the only people
able to be in charge, they must have been in charge of themselves. It cannot be
otherwise. There was no one else able to exert any direction or control over
them. Also, neither of them was in charge of the other since they were clear
that they operated the business as equal partners throughout. While small
business owners can be employees of their company, as a practical matter it
would be difficult to conclude the employment relationship is evidenced by the
company’s control over its owners. In this case, the direction and control
consideration also supports the Appellant’s independent contractor relationship
with Mr. Vail and Mr. Gustafson.
[20]
The Crown argued that,
since there was a corporation for whom they worked, Mr. Vail and
Mr. Gustafson must have been employees and that they could not be
self-employed in the sense of working for themselves since they clearly worked
for the corporation. Unfortunately, the term “self-employed” can be a most
confusing term. Fortunately, the legislation does not use it. Self-employed is
often used to describe a person who operates his or her own business as a sole
proprietorship. Of course, in such a case the so-called self-employment cannot
in law be employment since there is only one party. However, the term
“self-employment” is also often used by people who operate their small or
one-person business through a corporation. They may refer to themselves as
self-employed, and often without regard to whether they are employed by, or an
independent contractor of, their company. For this reason, the term
“self-employed” can often be confusing or misleading. It may have been the
cause of Mr. Gustafson’s misunderstanding about the technicalities of the
law. Similarly, it may have contributed to this part of the Crown’s argument.
In any event, it is simply not correct to say that because Mr. Gustafson
and Mr. Vail worked for a corporation, their relationship must ipso
facto be one of employment.
[21]
There was little, if
any, helpful evidence either way on the chance of profit/risk of loss
consideration, or the ownership of tools test. However, given the particular
importance of the intention of the parties and of the direction and control
test in the reasons of the Federal Court of Appeal in Royal Winnipeg Ballet,
an overall consideration of the evidence satisfies me on a balance of
probabilities that the working relationships were those of independent
contractors and not employees.
Travel allowances
[22]
Since Mr. Gustafson
and Mr. Vail were not employees of New Age Transport, the CPP appeal of
New Age Transport will be allowed. As set out above, the Crown conceded that
New Age Transport’s EI appeal should be allowed. I therefore do not need to
decide the second issue of whether the amounts paid to Mr. Gustafson and
Mr. Vail were reasonable travel allowances or travel expense
reimbursements that reduce income for tax purposes and therefore reduce
contributory salary and wages for CPP purposes.
[23]
However, from the
evidence and the pleadings, I understand that there are, or may soon be,
related issues arising with New Age Transport, Mr. Gustafson or
Mr. Vail under the Income Tax Act and for Mr. Gustafson and
Mr. Vail under the Canada Pension Plan. I feel I should warn these
parties that what little I heard or saw from them on the issue of travel
lodging, meal and similar expenses fell far short of what they should expect to
need to satisfy CRA or this Court should it come to that. In order to
substantiate expenses, or to demonstrate the reasonableness of an allowance, it
will be helpful if they can produce for CRA records such as logs showing when
and where they were and for how long; receipts, cheques or credit card
statements for lodging or meal expenses as well as for truck maintenance
expenses; supporting evidence that amounts payable to the workers were not fully
paid; financial statements, bank records, accounting records and/or tax returns
to corroborate what the company and the workers recorded as paid or received; and
other similar documents that would help confirm, corroborate, support or prove
their version of the events. Mr. Vail did testify he had kept receipts but
that he did not bring them to the Court for the hearing. Having heard and seen
their evidence on the issue of travel expenses and the allowances paid to them
in this case, I am certain the Appellant would have been disappointed if I had
had to decide the second point.
[24]
The EI and CPP appeals
of the Appellant New Age Transport are allowed. The EI assessment is referred
back to the Minister for reconsideration and reassessment on the basis that Mr.
Gustafson was not in insurable employment. The CPP assessment is vacated.
Signed at Ottawa, Canada, this 10th day of March 2008.
"Patrick Boyle"
Email this Content